Why Congress Won't Save Your Retirement

Don't expect a government bailout.

Lawmakers want to make sure your retirement savings will last longer than you do. But no matter what financial gimmicks they and financial-industry leaders come up with to stretch your money to the limit, they both ignore the only way you can be sure that your nest egg will last as long as it can.

Nothing lasts foreverStudies from the Employee Benefits Research Institute (EBRI) and the Center for Retirement Research at Boston College (CRR) paint a dire picture of the nation's retirement future. According to the CRR, only 17% of workers in 2007 had company-funded pensions, with 63% relying on employer-sponsored 401(k) retirement plan accounts to support them in their golden years. That's almost a complete reversal from the picture in the 1980s, when 62% of workers relied on their employers to fund pension plans.

In other words, companies have put the burden on workers to make sure they save enough to retire comfortably. Unfortunately, workers haven't been up to the task. According to the EBRI, nearly half of workers who are about to retire are likely to run out of money at some point during retirement. Given that the average amount in 401(k) plan accounts is an uncomfortably low $66,900, it's no big surprise that workers won't have enough to last.

Drawing blood from a stoneBut that isn't going to stop Congress and the financial industry from trying to perform the modern-day equivalent of alchemy for everyday savers. Reportedly, insurance companies Prudential(NYSE: PRU) and MetLife(NYSE: MET) are looking to incorporate annuities with guaranteed income provisions into target-date 401(k) portfolios. Developed in conjunction with investment managers BlackRock(NYSE: BLK) and Goldman Sachs(NYSE: GS), the products would ensure a base level of income for life no matter what happened to the investments within your portfolio.

The problem, though, is that annuities aren't the dream solution that many seem to think they are. What they're good for is taking a large chunk of money and transforming it into a constant, predictable lifetime stream of income. What they can't do, though, is create money where there wasn't any before. Based on one calculator, a 65-year-old woman with $66,900 to invest in an annuity could expect a monthly payment of less than $400. That isn't going to solve very many people's retirement problems.

The steps you have to takeAs difficult as it is, there's really only one thing you can do to be absolutely positive that you'll have enough money for retirement: Save more. As we've seen over the past 10 years, investments won't necessarily yield big payoffs even over relatively long periods of time. But setting aside big chunks of money in IRAs and 401(k) plan accounts will help you boost your nest egg no matter what happens to the markets.

On the other hand, you shouldn't completely discount the impact that smart investing can have for your retirement. Even during the lost decade, during which the stock market went essentially nowhere, more conservative stocks came through with decent returns. Altria(NYSE: MO) and PepsiCo(NYSE: PEP) had largely been left for dead 10 years ago, as trend-following investors gravitated toward sexier tech stocks. But both have posted impressive dividend growth over the years, and they still have excellent yields despite their gains. Similarly, Tupperware and Abbott Labs(NYSE: ABT) have provided steady growth over extended periods and look poised to continue to do so. Yet even after 2009's rally, they trade at reasonable valuations of less than 14 times trailing earnings and around 10 times forward estimates.

Eat your vegetables firstOnce you've built up your retirement savings sufficiently, then annuities can make more sense. You have to watch out for fees, though; annual guarantees can cost nearly a full percentage point annually. In a low-rate environment, that can cost you a big portion of your overall gains.

There's no doubt that Congress means well. But when it comes to giving personal financial advice, its own record with balancing budgets leaves it as just about the worst role model you could choose. Instead of expecting some sort of bailout for your retirement, the best move is to save for yourself with a mix of conservative income-producing investments. That way, you'll be in a better position to make your own decisions when it comes time to retire.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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